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BLKB > SEC Filings for BLKB > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for BLACKBAUD INC

Form 10-Q for BLACKBAUD INC


6-Aug-2014

Quarterly Report


Item 2. Management's discussion and analysis of financial condition and results
of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current view with respect to future events and financial performance and are subject to risks and uncertainties, including those set forth under "Safe Harbor Cautionary Statement" at the beginning of this report and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results. Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Executive summary
We provide cloud-based and on-premise software solutions and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations. We continue to make investments in our product portfolio and go-to-market organization to ensure we are properly positioned to benefit from shifts in the market, including demand for our subscription-based offerings. As of June 30, 2014, we had more than 30,000 active customers distributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare, as well as international affairs.
We derive revenue from charging subscription fees for the use of our cloud-based solutions, selling perpetual licenses and providing a broad offering of services, including consulting, training, installation and implementation services, as well as ongoing customer support and maintenance. Furthermore, we derive revenue from providing hosting services, performing donor prospect research engagements, selling lists of potential donors, providing transaction and payment processing services, benchmarking studies and data modeling services. We have experienced growth in our payment processing services from the continued shift to on-line giving, further integration of these services to our existing product portfolio and the sale of these services to new and existing customers. As a result of third-party contractual changes, certain of our subscriptions revenues and costs associated with our payment processing services are presented on a gross basis, whereas comparable revenues and costs are presented on a net basis in the prior year periods. As such, total revenue, total cost of revenue, subscriptions revenue and cost of subscriptions revenue for prior periods are not directly comparable, although gross profit, operating income and net income were unaffected by the prospective change, which became effective October 2013. An analysis of our historical financial statements for the four quarters and year ended December 31, 2013 can be found at www.blackbaud.com/investorrelations that is intended to assist with the evaluation of our performance in light of the change in presentation. During the second quarter of 2014, we remained focused on our four primary priorities:
accelerating organic revenue growth;

optimizing our product portfolio;

increasing recurring revenue; and

investing in infrastructure to drive future operating efficiencies.

Total revenue for the three and six months ended June 30, 2014 increased by approximately 11% when compared to the same periods in 2013, respectively. When removing the impact attributable to the change in presentation referenced above, revenue increased 5% for the three and six months ended June 30, 2014 when compared to the same periods in 2013. These increases were primarily the result of growth in demand for our cloud-based and hosted fundraising solutions as our business continues to shift towards subscription-based offerings. Increases in the volume of transactions for which we process payments as well as variable transactions associated with the use of our solutions to fundraise online added to the increases in subscriptions revenue.
Income from operations for the three and six months ended June 30, 2014 increased by $1.7 million and $6.4 million, respectively, when compared to the same periods in 2013. The increases in income from operations were primarily attributable to an increase in demand for our subscription-based fundraising offerings, an increase in the volume of transactions for which we process payments and an increase in transaction-based usage revenue. Also contributing to the increases in income from operations for the three and six months ended June 30, 2014 compared to the same periods in 2013 were decreases in restructuring costs, stock-based compensation and acquisition-related integration costs. These favorable impacts on income


Table of Contents

Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

from operations were partially offset by the 2014 incremental operating investments targeted to drive the success of our four primary priorities referenced above.
At June 30, 2014, our cash and cash equivalents were $24.8 million. During the six months ended June 30, 2014, we generated $45.1 million in cash flow from operations, received $19.6 million in net proceeds from debt refinancing, used net cash of $32.6 million for the acquisition of WhippleHill, returned $11.1 million to stockholders by way of dividends and had cash outlays of $9.3 million for purchases of property and equipment and software development costs. During the three months ended June 30, 2014, we continued to experience growth in overall revenue primarily driven by the growing demand for our cloud-based and hosted fundraising solutions and payment processing services. We plan to further increase our focus on subscription-based offerings and expand our payment processing services as we execute on our key growth initiatives and strengthen our leadership position, while achieving our targeted level of profitability. In the near term, we anticipate that there will continue to be an impact on our profitability as we invest in our product portfolio to meet demand for our subscription offerings and shift from a perpetual license-based model, with upfront revenue recognition to a subscription-based model, with recognition of revenue occurring ratably over the subscription term. In the near term, we also anticipate that there will continue to be an impact from our payment processing services on our overall gross margin percentage as growth in the volume of transactions where we provide payment processing services is expected to exceed the growth of certain other product and service offerings. We also plan to continue to invest in our product, sales and marketing organizations and our back-office processes; the infrastructure that supports our subscription-based offerings and certain product development initiatives to achieve optimal scalability of our operations as we execute on our key growth initiatives.
Recent developments
Debt refinancing
In February 2014, we entered into a five-year $325.0 million credit facility and drew $175.0 million on a term loan upon closing, which was used to repay all amounts outstanding under our previous credit facility. The credit facility includes the following facilities: (i) a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans, and (ii) a term loan facility. The credit facility is secured by the stock and limited liability company interests of certain of our subsidiaries and is guaranteed by our material domestic subsidiaries. WhippleHill acquisition
On June 16, 2014, we acquired all of the outstanding stock of WhippleHill Communications, Inc. ("WhippleHill"), a privately held company based in New Hampshire, for $35.0 million in cash, subject to certain adjustments set forth in the stock purchase agreement. WhippleHill is a leading provider of cloud-based solutions designed exclusively to serve K12 private schools. The acquisition of WhippleHill expanded our offerings in the K12 technology sector. The operating results of WhippleHill which were insignificant to the periods presented have been included in our consolidated financial statements from the date of acquisition.


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                                Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
                           of operations (continued)


Comparison of the three and six months ended June 30, 2014 and 2013
Results of operations
Revenue by segment
                    Three months ended June
                                        30,                                Six months ended June 30,
(in millions)            2014          2013       Change     % Change             2014          2013       Change     % Change
ECBU             $       54.4   (1) $  49.3     $    5.1           10 %   $      104.2   (1) $  94.0     $   10.2           11 %
GMBU                     63.2   (1)    55.9          7.3           13 %          120.8   (1)   109.0         11.8           11 %
IBU                      12.1   (1)    10.8          1.3           12 %           22.8   (1)    20.0          2.8           14 %
Target Analytics          9.7           9.5          0.2            2 %           19.1          18.1          1.0            6 %
Other                       -             -            -            - %            0.1             -          0.1          100 %
Total revenue    $      139.4       $ 125.5     $   13.9           11 %   $      267.0       $ 241.1     $   25.9           11 %

(1) Included in ECBU, GMBU and IBU revenue for the three months ended June 30, 2014 was $2.4 million, $4.7 million and $0.4 million, respectively, attributable to the prospective change in presentation from net to gross for revenue and costs associated with our payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013. Included in ECBU, GMBU and IBU revenue for the six months ended June 30, 2014 was $4.6 million, $8.4 million and $0.6 million, respectively, attributable to this same presentation change.

The increases in revenue for ECBU and GMBU during the three and six months ended June 30, 2014 when compared to the same periods in 2013 were primarily attributable to growth in subscriptions revenue. The growth in subscriptions resulted from an increase in demand for our cloud-based and hosted fundraising offerings, an increase in the volume of transactions for which we process payments and an increase in usage-based transaction revenue. Also contributing to the growth in ECBU and GMBU revenue were increases in maintenance revenue primarily from new customers associated with new license agreements and increases in contracts with existing customers.

IBU revenue increased during the three and six months ended June 30, 2014 when compared to the same periods in 2013 primarily due to incremental subscriptions revenue. The growth in IBU subscriptions revenue was primarily attributable to an increase in demand for our cloud-based solutions including Everyday Hero and eTapestry and for our hosted fundraising solutions including the Raiser's Edge. Also contributing to the increase in IBU subscriptions revenue was an increase in the volume of transactions associated with the use of our products to fundraise online. IBU maintenance revenue associated with sales of the Raiser's Edge increased during the three and six months ended June 30, 2014 when compared to the same periods in 2013.

Target Analytics revenue remained relatively unchanged during the three months ended June 30, 2014 when compared to the same period in 2013. The growth in Target Analytics revenue during the six months ended June 30, 2014 when compared to the same period in 2013 was primarily the result of an increase in demand for our subscription-based analytic service offerings. We anticipate incremental growth in this area as demand continues to increase and as we continue to integrate these services into certain of our other subscription and service offerings.


Table of Contents

                                Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
                           of operations (continued)


Operating results
License fees
                        Three months ended June 30,                                        Six months ended June 30,
(in millions)            2014                  2013       Change     % Change              2014                 2013       Change     % Change
License fees
revenue         $         4.5         $         6.0     $   (1.5 )        (25 )%   $        8.4         $        9.0     $   (0.6 )         (7 )%
Cost of license
fees                      0.5                   0.6         (0.1 )        (17 )%            1.0                  1.4         (0.4 )        (29 )%
License fees
gross profit    $         4.0         $         5.4     $   (1.4 )        (26 )%   $        7.4         $        7.6     $   (0.2 )         (3 )%
License fees
gross margin               89 %                  90 %                                        88 %                 84 %

We derive license fees revenue from the sale of our software products under perpetual license agreements. During the three and six months ended June 30, 2014, revenue from license fees decreased primarily as a result of smaller contributions of revenue from our Blackbaud CRM and Raiser's Edge offerings when compared to the same periods in 2013. Our larger perpetual license transactions, such as those for Blackbaud CRM, have long sales cycles and their timing can result in significant period-to-period variations in revenue. Additionally, we continue to experience a shift in our emerging and mid-sized customers' buying preferences away from solutions offered under perpetual license arrangements towards subscription-based hosted applications.
Cost of license fees is primarily comprised of third-party software royalties, variable reseller commissions, amortization of software development costs and amortization of intangibles from business combinations. The decrease in cost of license fees during the three and six months ended June 30, 2014 when compared to the same periods in 2013 was primarily due to a reduction in reseller commissions and fewer sales of products with associated third-party royalty costs. The decrease in reseller commissions was primarily due to improvements in the negotiated rates we pay software resellers.
License fees gross margin percentage during the three months ended June 30, 2014 remained relatively unchanged. The increase in license fees gross margin percentage for the six months ended June 30, 2014 when compared to the same period in 2013 was primarily due to the decrease in reseller commissions and less sales of products with third-party software royalties associated with them relative to the decrease in license fees revenue.

Subscriptions
                    Three months ended June 30,                                      Six months ended June 30,
(in millions)        2014                  2013       Change     % Change             2014                2013       Change     % Change
Subscriptions
revenue       $      65.0    (1)    $      52.0     $   13.0           25 %   $      123.3    (1)   $     99.7     $   23.6           24 %
Cost of
subscriptions        31.8    (1)           21.6         10.2           47 %           61.9    (1)         42.0         19.9           47 %
Subscriptions
gross profit  $      33.2           $      30.4     $    2.8            9 %   $       61.4          $     57.7     $    3.7            6 %
Subscriptions
gross margin           51 %                  58 %                                       50 %                58 %

(1) Included in subscriptions revenue and cost of subscriptions for the three and six months ended June 30, 2014 was $7.5 million and $13.6 million, respectively, attributable to the prospective change in presentation from net to gross for revenue and costs associated with our payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013.

Revenue from subscriptions is primarily comprised of revenue from charging for the use of our subscription-based software products, which includes providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings, revenue from payment processing services as well as variable transaction revenue associated with the use of our products to fundraise online. We continue to experience growth in sales of our hosted applications and hosting services as we meet the demand of our emerging and mid-sized customers that increasingly prefer subscription-based offerings. In addition, we have experienced growth in our payment processing services from the continued shift to on-line giving, further integration of these services to our existing product portfolio and the sale of these services to new and existing customers.

Excluding the effect of the change in presentation associated with our payment processing services as discussed above, the increase in subscriptions revenue during the three and six months ended June 30, 2014 when compared to the same periods in 2013 was primarily due an increase in demand for our cloud-based solutions including Luminate Online and Altru and for our


Table of Contents

Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

hosted fundraising solutions including the Raiser's Edge and Blackbaud CRM. Subscriptions revenue also increased as a result of greater volume of transactions for which we process payments and an increase in usage-based transaction revenue.
Cost of subscriptions is primarily comprised of human resource costs, stock-based compensation expense, third-party royalty and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers.
Excluding the effects of the change in presentation associated with our payment processing services as discussed above, the increases in cost of subscriptions during the three and six months ended June 30, 2014 when compared to the same periods in 2013 were primarily due to an increase in human resource costs of $2.3 million and $4.5 million, respectively, and an increase in allocated depreciation, facilities and IT support costs of $0.4 million and $0.9 million, respectively. The increase in human resource costs was primarily due to an increase in subscription customer support directly related to our growing base of subscription customers. The increase in allocated costs was primarily a result of investments made to support anticipated growth in our operations. The decrease in subscriptions gross margin percentages for the three and six months ended June 30, 2014 when compared to the same periods in 2013 was primarily a result of the prospective change in presentation from net to gross revenues and costs as discussed above, which had no impact on gross profit. Absent this presentation change, subscriptions gross margin percentages were 58% and 56% for the three and six months ended June 30, 2014, respectively, compared to 58% and 58% in the same periods in 2013, respectively. The remaining decrease in subscriptions gross margin percentage for the six months ended June 30, 2014 when compared to the same period in 2013 was primarily due to increases in human resource costs and allocated costs outpacing the growth in subscriptions revenue. In the near term, we anticipate that there will continue to be a negative impact from our payment processing services on our subscriptions gross margin percentage as growth in the volume of transactions where we provide payment processing services is expected to exceed the growth of certain of our other subscription-based offerings.

Services
                        Three months ended June 30,                                      Six months ended June 30,
(in millions)            2014                  2013       Change     % Change               2014              2013       Change     % Change
Services
revenue         $        31.8         $        31.4     $    0.4            1  %   $        59.9         $    60.2     $   (0.3 )          -  %
Cost of
services                 25.5                  26.5         (1.0 )         (4 )%            51.8              51.9         (0.1 )          -  %
Services gross
profit          $         6.3         $         4.9     $    1.4           29  %   $         8.1         $     8.3     $   (0.2 )         (2 )%
Services gross
margin                     20 %                  16 %                                         14 %              14 %

We derive services revenue from consulting, installation, implementation, education and analytic services. Consulting, installation and implementation services involve converting data from a customer's existing system, assistance in file set up and system configuration, and/or process re-engineering. Education services involve customer training activities. Analytic services are comprised of donor prospect research, sales of lists of potential donors, benchmarking studies and data modeling services. These analytic services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product is intended to enable organizations to more effectively target their fundraising activities.
Services revenue during the three and six months ended June 30, 2014 when compared to the same periods in 2013 remained relatively unchanged. The continuing shift in our go-to-market strategy towards subscription-based and cloud-based offerings, which, in general, require less implementation services than our traditional on-premise perpetual license arrangements has negatively impacted consulting services revenue growth.
Cost of services is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, classroom rentals, costs incurred in providing customer training, data expense incurred to perform analytic services, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations.
The decrease in cost of services during the three months ended June 30, 2014 when compared to the same period in 2013 was primarily attributable to a decrease in human resource costs, partially offset by increases in the recognition of deferred implementation service costs, and allocated depreciation, facilities and IT support costs. Human resource costs decreased primarily as a result of a decrease in headcount and an increase in operating efficiency. Our recognition of implementation


Table of Contents

Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

service costs increased during the three months ended June 30, 2014 compared to the same period in 2013 due to a decrease in the amount of costs that are being deferred in connection with our shift from traditional license and related service arrangements to subscription offerings. The increases in allocated costs were primarily a result of investments made to support anticipated growth in operations.
Cost of services during the six months ended June 30, 2014 when compared to the same period in 2013 remained relatively unchanged.
Services gross margin percentage increased during the three months ended June 30, 2014 when compared to the same period in 2013 primarily due to the decrease in human resource costs relative to the minor change in services revenue. Services gross margin percentage for the six months ended June 30, 2014 when compared to the same period in 2013 remained relatively unchanged.

Maintenance
                        Three months ended June 30,                                      Six months ended June 30,
(in millions)            2014                  2013       Change     % Change               2014              2013       Change     % Change
Maintenance
revenue         $        36.5         $        34.1     $    2.4            7  %   $        72.2         $    68.3     $    3.9            6  %
Cost of
maintenance               6.0                   6.6         (0.6 )         (9 )%            11.4              12.4         (1.0 )         (8 )%
Maintenance
gross profit    $        30.5         $        27.5     $    3.0           11  %   $        60.8         $    55.9     $    4.9            9  %
Maintenance
gross margin               84 %                  81 %                                         84 %              82 %

Revenue from maintenance is comprised of annual fees derived from maintenance contracts associated with new software licenses and annual renewals of existing maintenance contracts. These contracts provide customers with updates, enhancements and upgrades to our software products and online, telephone and email support. Maintenance contracts are typically for a term of one year, and maintenance renewal rates in the periods reported did not vary materially compared to prior periods.
The increase in maintenance revenue during the three months ended June 30, 2014 when compared to the same period in 2013 was primarily comprised of (i) $2.4 million of incremental maintenance from new customers associated with new license agreements and increases in contracts with existing customers; and
(ii) approximately $1.0 million of incremental maintenance from contractual inflationary rate adjustments; partially offset by (iii) a $1.6 million reduction in maintenance from contracts that were not renewed and reductions in contracts with existing customers. The increase in maintenance revenue during the six months ended June 30, 2014 when compared to the same period in 2013 was primarily comprised of (i) $5.2 million of incremental maintenance from new customers associated with new license agreements and increases in contracts with existing customers; and
(ii) approximately $2.1 million of incremental maintenance from contractual inflationary rate adjustments; partially offset by (iii) a $3.5 million reduction in maintenance from contracts that were not renewed and reductions in contracts with existing customers. Cost of maintenance is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing . . .

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